THE DEDUCTIBLE LOLITA EXPRESS?

Cady Stanton writes for Tax Notes:

Wyden Questions IRS on Jeffrey Epstein’s Tax Planning Services

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The top Senate Democratic taxwriter is pressing the IRS on why it didn’t audit or investigate convicted sex trafficker and financier Jeffrey Epstein’s tax planning services and transactions.

Senate Finance Committee ranking member Ron Wyden, D-Ore., wrote to IRS Commissioner Billy Long in a July 31 letter arguing that the agency failed to investigate alleged tax planning work performed by Epstein on behalf of billionaire Leon Black.

Epstein served 13 months in custody after pleading guilty in 2008 to sex-trafficking-related charges brought by Florida authorities. He was arrested on federal sex trafficking charges in July 2019 and died in jail a month later.

“Epstein lacked any professional training or certifications in accounting or tax law, yet was chosen by very wealthy people to execute very complex tax-related financial transactions,” Wyden wrote in the letter. “Despite this glaring lack of qualifications that might lead anyone to double check Epstein’s work, it appears that the IRS failed over the course of many years to audit major tax transactions involving Epstein.”

The Finance Committee has spent almost four years investigating the financing of Epstein’s sex trafficking operation, finding that certain tax arrangements between Epstein and Black have never been audited by the IRS, according to the letter.

The IRS didn’t reply to a request for comment by press time.

The Finance Committee investigation found that Black paid Epstein more than $158 million to devise an alleged tax “solution” for a defective trust that helped Black avoid more than $1 billion in future estate tax liabilities, according to a memorandum submitted on Black’s behalf as part of the investigation.

The letter also cites a document from Apollo Global Management that found that most of the payments from Black to Epstein were made without any form of written contract or business services agreement.

“The idea that a prominent Wall Street billionaire would simply cough up $100 million to Jeffrey Epstein without any supporting documentation is suspect,” Wyden wrote. “These payments were well in excess of expected compensation for tax and estate planning services — particularly in a case where Epstein’s work had to be vetted by other legal and accounting professionals, at times was not viewed as useful, and included instances of substantial misrepresentations of tax laws.”

Wyden asked the IRS to provide information on any audits or investigations it conducted on transactions involving Epstein, as well as their status and end results; a determination on whether the IRS has evaluated the full scope of the tax planning Epstein provided; and an analysis of whether his tax planning has been evaluated by the IRS in the past eight years and whether the agency determined that the value of the services he provided warranted his reported compensation.

The letter comes the week after House Democrats forced Speaker Mike Johnson, R-La., to recess the chamber for the summer a day earlier than scheduled. Democrats and a handful of Republicans attempted to force a floor vote to compel the release of materials related to Epstein, a move that Johnson called “political games.”

REGULATING ADVICE

The thing is though: do we have free markets or not?

Advisors can obtain a competitive advantage by being a registered professional: being a registered attorney by passing the relevant State Bar. OK so now that advisor has volunteered to be subject to State Bar and ABA Rules: as the price of that competitive advantage. Qualified status engages an opportunity to hire big lawyer bucks.

But everyone is free to give legal advice, qualified or not. It is a consumer market choice whether you listen to the advisor at all, and what you pay them.

So, your advisor turns out to be a convicted sex trafficker. No offense to lawyers, but there are plenty of skeletons – sexual and otherwise – in their closest.

Stripping away the Epstein hype and Senate p.r. opportunity, this is just a call on the IRS to discriminate in its audits between transactions taken with the advice of one category of advisor over another. But that distinction is none of the IRS’ business. Whether an idea is good or bad is not a function of the professional – or other – status of the inventor.

What’s the issue anyway? Bad tax ideas don’t result in the IRS failing to collect tax. Good tax ideas do, because they work.